Informatica Corporation Q2 2009 Earnings Call Transcript

Informatica Corporation (INFA)

Q2 2009 Earnings Call

July 23, 2009 5:00 pm ET

Executives

Stephanie Wakefield - Senior Director, IR

Sohaib Abbasi - CEO

Earl Fry - CFO

Analysts

Tom Ernst - Deutsche Bank

Tom Roderick - Thomas Wiesel Partners

Mark Murphy - Piper Jaffray

Nathan Schneiderman - Roth Capital Partners

Brian Denyeau - Oppenheimer & Company

Brad Whitt - Broadpoint AmTech

Brent Williams - The Benchmark Company

Nabil Elsheshai - Pacific Crest Securities

Derrick Wood - Wedbush Morgan Securities

Patrick Walravens - JMP Securities

Brad Self - Barclays Capital

Daniel Cummins - Soleil

Presentation

Operator

Good day ladies and gentlemen, and welcome to the Second Quarter 2009 Informatica Earnings Call. My name is Stacy, and I will be your conference moderator for today.

At this time, all participants are in listen-only mode, and we will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call Ms. Stephanie Wakefield, Senior Director of Investor Relations. Please proceed.

Stephanie Wakefield

Good afternoon and thank you for joining us today. I am here with Sohaib Abbasi, CEO; and Earl Fry, CFO to discuss our Q2 2009 results, and to talk about our outlook for the business. I will read the Safe Harbor statement and then hand it over to Sohaib for his comments.

Some of the comments we will make today are forward-looking statements, including statements concerning our being well positioned to pursue our growth strategy; our projected financial results for future periods; opportunities for growth in the data integration market; the expected benefit of those to our customers and products; the acquisition and integration of AddressDoctors, its employees and its technology; the planned use of our products by some customers for more than traditional data warehousing projects; the strength of customer demand for our products, customer adoption of our latest product lines, efforts being conducted with strategic partners, our announcement of PowerCenter Cloud Edition and Informatica On Demand PowerCenter Service, and our expectations regarding future industry trends and macroeconomic developments.

All forward-looking statements are based upon current expectations and beliefs. However, actual results could differ materially. There are many reasons why actual results may differ from our current expectations. These forward-looking statements should not be relied upon, as representing our views as of any subsequent date, and Informatica undertakes no obligation to update forward-looking statements, to reflect events or circumstances after the date that they are made.

Please refer to our recent SEC filings, including the Form 10-Q for the quarter ended March 31, 2009 for a detailed description of the risk factors that may affect our results. Copies of these documents maybe obtained from the SEC or by contacting our Investor Relations department.

During this afternoon's discussion, we will be using GAAP and non-GAAP numbers. Our GAAP numbers and a reconciliation of the GAAP numbers to the non-GAAP numbers are contained in the earnings press release and in the supplemental metric section of our Investor website at www.informatica.com/investor.

Before I hand it off to Sohaib, I'd like to remind you that this call is being webcast, and will also be available for replay at www. informatica.com/investor. I would also like to ask you when we get to the question-and-answer period, to please confine yourself to just one question. We will allow additional questions if time permits. Thank you.

Sohaib Abbasi

In Q2, 2009 we achieved record second quarter revenues and record second quarter operating income, making it our 19th consecutive quarter of record non-GAAP operating income.

Our sustained record results over the past five years, despite the unprecedented macroeconomic challenges, underscore the merits of our focused strategy to establish Informatica as the number one independent leader in the data integration, infrastructure software market.

Total revenues grew by 3% year-over-year to $117.3 million, and new license revenues are $48.7 million, were consistent with Q2, 2008 results. Adjusting for the negative impact of changes in currency exchange rates, total revenues would have grown by 9% and new license revenues by 5%.

Total non-GAAP operating income grew by 22% year-over-year, with non-GAAP operating margins up 22.6%, an increase of 350 basis points in operating margin. With non-GAAP EPS of $0.19, we achieved the most profitable second quarter ever. I would like to recognize and thank the Informatica team for their [exemplary] operational discipline.

As observed by some economists, the impact of the economic recession now varies by geographic regions. Specifically the macroeconomic environment is comparatively better in regions that were first affected by the recession. This change in macroeconomic impact is reflected in our regional results.

In the Americas, customers in certain industries such as financial services are starting to prepare for the macroeconomic recovery. In Europe, the more recent economic downturn continues to affect customer priorities and purchasing processes.

In Asia Pacific including Japan, we continue to benefit from relatively consistent customer demand. Across all major geographic regions, the prevailing macroeconomic outlook continues to shape the primary business strategies of our customers.

In turn, the associated IT initiatives have elevated the priority and urgency of the enabling data integration projects, as illustrated by our customer wins around the world.

In the Americas, the Investment Banking division of a large global bank selected Informatica for several business-critical IT initiatives. Using Informatica data quality, including identity resolution, the bank plans consolidate customer data from several [discrete] systems into one global CRM system, to help improve customer service and increase revenues.

Using Informatica B2B data exchange, the bank plans to build a real-time data warehouse for risk management. Also in the Americas, a leading energy company and Informatica Innovation Award winner, Duke Energy expanded its use of Informatica as an enterprise-wide standard for their Integration Competency Center.

Duke Energy chose Informatica for high priority IT initiatives, including regulatory compliance, smart grid, and a customer hub to drive profitable [work] growth with world class customer service.

In Europe, a world leading financial services company, Credit Suisse, selected Informatica data quality for its private banking data warehouse, estimated to save annually millions of dollars. In Asia Pacific, Japan Post Office Network selected Informatica as its cloud computing data integration standard.

With the privatization of Japan Post Group into four commercial businesses, Japan Post Office Network provides IT and other services to the other three; bank, insurance and service.

To modernize its IT infrastructure, Japan Post chose a Salesforce.com's, force.com cloud computing platform for its 160,000 users. With Informatica, Japan Post expects to reduce the cost for data migration from legacy applications, and more importantly to retain control over the data managed by the force.com cloud computing platform.

These customer wins around the world, illustrate that our addressable market is no longer limited to a single discretionary IT budget item for data warehousing projects, but encompasses many business critical IT budget items for broader data integration projects.

Representing this growing trend in Q2, 55% of our deals over $100,000 were with the customers that plan to use Informatica for more than data warehousing. In addition, in Q2 more than 78% of our professional services fees were from consulting engagements beyond traditional data warehousing, including data migration and mass data management projects.

We continue to benefit from growing customer adoption of the latest innovations, within our broadest ever product portfolio that includes five infrastructure software categories, enterprise data integration, data quality, B2B data exchange, application information lifecycle management and cloud computing data integration.

In the data integration category, almost 80% of PowerCenter transactions, over $300,000 included Informatica platform or premium price divisions, real-time and advance, and 45% included add-on options.

Our track record of leadership and our well differentiated product value proposition are helping us win important customer decisions over our cost competitors. As an example, the Hillsborough County Sheriff's Office in Florida selected Informatica over IBM and Business Objects to replace Microsoft SQL server integration services for their modern intelligence (inaudible) releasing model.

Hillsborough County chose for Informatica for our well-differentiated value, cost effective scalability, robust resilience, labor saving productivity, and unique data quality capabilities including identity resolution. With timely holistic and trustworthy data, Hillsborough County Sheriff's Office expects to be more effective in their prevention, apprehension and prosecution policing efforts.

In the Data Quality category; in Q2, we further advanced our leadership with our strategic acquisition of AddressDoctor, a leader in global address validation. Last quarter, 57% of the transactions over $300,000 included data quality products. For example, Providence Health & Services selected Informatica data quality, including identity resolution for their physician order set master data management or data hub projects.

High quality data, in this data hub will help to improve the quality of healthcare services and reduce cost across 26 hospitals and more than a 35 non-acute facilities.

In the B2B data exchange category, with our focused go-to-market programs, we won several important customer decisions. As an example; a regulatory agency selected Informatica to manage unstructured data fees from banks, mandated by new requirements resulting from the recent financial crisis.

In the new Application ILM category, several customers including Comprehensive Health, EMC and Allergan selected Informatica to reduce storage and data base cost associated with inactive or test data. As an example, Allergan selected ILM to reduce its IT cost by retiring a package business application.

Using Informatica ILM, Allergan expects to eliminate the hardware, software and support costs of this legacy application, while retaining access to the archive data.

Finally, in the Cloud Computing Data Integration category; today we announced a new product, PowerCenter Cloud Edition and a new complementary Informatica On Demand offering PowerCenter Service.

With PowerCenter Cloud Edition, IT Departments can deploy PowerCenter on Amazon EC2 web services infrastructure to integrate data managed by Amazon EC2, other cloud computing vendors and even on-premise applications.

And with the complementary Informatica On Demand PowerCenter Service, IT departments can productively managed their PowerCenter Cloud Edition based data integration jobs, running remotely on Amazon EC2, simply by using in its net browser.

Now with the flexibility of deploying PowerCenter on-premise or on Amazon EC2, IT departments can optimize for both performance and network cost by running PowerCenter near the primary data sources.

At the same time, IT departments can optimized for hardware, software and labor costs, by selectively using the economical cloud computing model with the (inaudible) views PowerCenter Cloud Edition price.

Finally, the ongoing IT industry consolidation distinguishes Informatica as the neutral independent leader in data integration, to further strengthen our partnerships. With our track record of neutrality, partners and customers can rely on Informatica to leverage their existing IT investments and embrace new IT innovations.

Informatica, unlike the IT industry giant, does not have any hidden agendas to promote one database over another, one middleware stack over another, one business intelligences offering over another, or one business application suite over another.

In fact our neutrality is the best insurance against the uncertainty of industry consolidations. With Informatica, our customers are assured that they are not locked into a single vendor and more importantly are not locked out of this single most valued IT asset, their data.

Together with our strategic partners, we won key customer decisions. With Accenture we won at Credit Suisse and Japan Post. With Wipro we won several customer decisions, including those at Hyundai and Friends Provident. Jointly with HP, we won at JPMorgan and Providence Health.

In Q2, Informatica established new OEM partnerships with six vendors including the leading the risk management IT company, Risk Management Systems. RMS plans to embed Informatica in its comprehensive catastrophe management solutions for the insurance and reinsurance [industries].

To sum up, our record Q2 results representing yet another milestone of sustained performance are a testament to our focused strategy, lasting customer demands, relentless innovation and the team's exceptional operational discipline.

Now I will turn it over to Earl to give you more details on our financial results. After Earl's presentation, I'll comment on our business outlook and key initiatives.

Earl Fry

Thanks, Sohaib. Despite the continued macroeconomic environment and those difficulties, total revenues for Q2 grew to $117.3 million, up 3% on a year-over-year basis and in the middle of our guidance range. This includes a year-over-year currency headwind of $6.50 million. Holding currencies constant with Q2 2008 rates, our Q2 2009 revenue would have been $123.8 million or up 9% over the $113.8 million recorded last Q2.

License revenues came in at $48.7 million, up $0.2 million year-over-year and up $4.7 million or 11% sequentially. On a constant currency basis, license revenues would have been up $2.4 million or 5% higher than Q2 a year ago.

Service revenues were $68.6 million, up 5% year-over-year and up 6% sequentially. Breaking down the component of service revenues, maintenance revenues were strong at $51.8 million, up 14% year-over-year, while consulting and education revenues continued to be impacted by the macroeconomic slowdown and came in at $16.8 million, down 15% year-over-year.

Our yield metrics were solid. Existing customers contributed 78% of our license order value, down slightly from 80% in the first quarter and up from 76% in the second quarter of 2008. We did license business with 237 existing customers and added a healthy 65 new customers during the quarter.

We booked nine transactions of over $1 million, up from six in the year ago second quarter. We closed 44 deals over $300,000, down from 54 in the year ago second quarter.

Our average transaction size for orders over $100,000 came in at $344,000, and the average transaction size for orders over $50,000 came in at $243,000, both up from year ago levels and reflective of the rebound in the number of deals over $1 million.

In terms of our license orders, 74% came from our direct reps and 26% of our orders were from the indirect channel. In addition to the 26% sold indirectly, we had 41% of our direct orders in Q2 influenced by partners or resellers.

The overall total of indirect and influenced orders was 67%, up from 56% last quarter and up from 53% a year ago. License revenue from our direct business was 77% in Q2, with 23% of our license revenue coming from the indirect channel.

Moving to geographic mix, international orders as a percentage of total license bookings were 37%, down from 42% a year ago, but relatively consistent with 36% in the first quarter.

International revenue was 34% of total revenue in Q2, up from 31% a year ago and the same as the first quarter. Similar to what we experienced in Q1, in Q2 the negative impact from currency was essentially offset by the continued growth and contribution from our Latin America and Asia operations.

From a vertical industry perspective, financial services continued to be our largest contributor followed by government, communications and healthcare. Domestic financial services showed particularly strong growth, both on a year-over-year as well as a sequential basis.

Non-GAAP gross profit, which excludes $1.9 million in amortization of acquired technology and $0.6 million of share based comp, came in at $98.9 million or 84% in Q2, better than our target range of 80 to 82%, and reflecting the increased mix of high margin license and maintenance revenue.

License margins were 99% in Q2, up from 98% in the prior and year ago quarter. Service margins driven by 95% maintenance renewals and our ever increasing installed base were 74%, up from 72% last quarter and up notably from 68% a year ago.

Excluding charges for share based payment facility, restructuring and amortization of intangible assets of $7 million. Q2 non-GAAP operating expenses were $72.4 million, up from $66.8 million in the first quarter and up from $70.3 million in the year ago second quarter, due to increased investments in R&D and sales and marketing, as well as increased litigation and acquisition expenses.

As a percentage of revenue, non-GAAP operating expenses were 62% of revenue for the second quarter, the same as a year ago. As a result of higher revenues and continued cost discipline in Q2, we generated a second quarter record $26.5 million in non-GAAP operating income, up 22% from a year ago.

As a percentage of revenue, non-GAAP operating income was 22.6%, 350 basis points better than the 19.1% non-GAAP operating income reported a year ago, and reflects our continued commitment to grow operating margins.

Net interest and other income continues to be impacted by declining interest income, as investment yield continue to contract and resulted in a net expense of $7000 in the second quarter.

Our tax provision, both on a GAAP and non-GAAP basis was 30% in the second quarter, reasonably consistent with expectations. During the quarter, we signed an agreement with IRS, settling the outstanding federal tax audits for all tax years through 2006.

Bottom-line, despite the year-over-year currency headwinds, which negatively impacted revenue by $6.5 million and negatively impacted operating income by over $600,000, our strong customer value proposition combined with continued operating discipline, allowed us to deliver GAAP net income of $12 million and achieve a second quarter record GAAP fully diluted EPS of $0.13.

And on a non-GAAP fully diluted basis, we came in at a very high end of our earnings range and generated second quarter record non-GAAP EPS of $0.19.

Based on Q2 orders, our future revenues disclosure, which includes deferred revenue balances as well as orders not yet taken for revenue as of June 30, will be $142.1 million, up $1.7 million sequentially and up $2.6 million compared to a year ago.

On a constant currency basis, using Q2 '08 rates, future revenues would have been $147.1 million, up $7.6 million or 5% higher than a year ago.

Total headcount was 1,695 at June 30th, an increase of 29 from the end of Q1, almost entirely due to the acquisition of AddressDoctor. Sales and marketing headcount ended the quarter at 611, an increase of seven. We expect to continue adding headcount very selectively for the remainder of the year.

We generated $19.1 million in cash from operations in Q2, better than the $12.9 million generated in Q1 '09, and better because the $12.8 million generated in the second quarter a year ago. We ended the quarter with over $421 million in cash and investments, up slightly from Q1 and during the quarter, we used $3.1 million to repurchase 203,000 shares of our stock and paid for the AddressDoctor acquisition.

DSOs were 61 days in Q2, up from 55 days in Q1, and up from 50 days a year ago, but within our target DSO range of 55 to 65 days. The DSO increase is reflective of the macroeconomic environment and some customers are taking slightly longer to pay. And in addition many customers continue to place their orders later in the quarter.

Our deferred revenue balance increased to a second quarter record $127.9 million, and is comprised of $122.6 million in the current deferrals and $5.3 million in long term deferrals. Deferred revenues are up $6.1 million from a year ago and up $0.2 million on a sequential basis. Deferred revenue balances include a 3% or $4.4 million currency headwind compared to a year ago.

On a constant currency basis compared to Q2 2008, deferred revenues would have been $132.3 million or up 9% versus $121.8 million a year ago. On a non-GAAP basis, we ended the quarter with 102 million shares outstanding on a fully diluted, if converted basis.

Now looking forward, from a share count perspective, we expect shares outstanding to remain relatively flat for a few quarters, and due to lower interest rates, we expect net interest and other income to remain slightly negative for the remainder of the year.

We expect our income tax provision to continue to be very sensitive to our geographic mix of earnings, and we expect our effective tax rate will be roughly 31% on a non-GAAP basis, before the impact of any discrete tax items.

Now, while the current macroeconomic environment is still difficult and continues have an impact on our business, we are encouraged by increased signs of stabilization in our domestic business and remain optimist about our growth prospectus in Latin America and Asia.

Despite the challenges, we expect to continue to see in our consulting and education businesses, we still believe that we can grow total revenue for all of 2009 by a mid-single digit percentage. And we are confidant in our ability to deliver non-GAAP operating margins up 23% or better for the full year of 2009. We continue to expect non-GAAP EPS to grow at a slightly faster rate than revenue in 2009.

For the third quarter of 2009, we expect that continued growth in our maintenance space of customers were more than offset by difficult environment for consulting and education services, and that more constructive customer buying patterns in the Americas will offset most if not all of the seasonality that we expect from India.

As such, we are targeting Q3 '09 revenue $116 million to $121 million, with non-GAAP EPS in a range of $0.18 to $0.21. As a reminder, our non-GAAP EPS targets do not include the after-tax impact of an estimated $0.03 per share per quarter charge for the amortization of intangibles and acquired technology, the facilities restructuring charge of approximately $0.005 per share per quarter and the tax affected impact of stock option expense of approximately $0.03 per share per quarter.

With that, I'll turn it over to Sohaib.

Sohaib Abbasi

Thanks Earl. We continue to attain record results with our singular focus on data integration. Five years ago, recognizing the promising value of information asset marked within IT systems, we articulated our vision of data integration within the enterprise and beyond the enterprise.

To realize this value, data must be integrated at cost [descript] on-premise applications as well as off-premise sources, managed by outsourcing service providers, such as business processing outsourcing and cloud computing vendors.

Guided by this vision, our focused growth strategy has served Informatica well with sustained direct results. Through relentless innovations, Informatica has grown to become the pioneering leader in enterprise data integration, multi-enterprise data integration, and cloud computing data integration.

To further expand our addressable markets, the upcoming version 9 product release will deliver compelling differentiated value to IT staff and many more, including business users. To facilitate IT business alignment, version 9 will empower business users with self-service, simple-to-use specification tools, expanding our addressable market beyond the traditional IT user.

In June, in light of the recession, we scaled back our annual customer event to focus on a technical deep dive of version 9. The response at this well attended event, encouragingly affirmed that the key innovations themes in version 9 were among the top customer priority.

As a reminder, version 9 will offer more value to our customers in three areas; IT business collaboration, pervasive data quality and innovative SOA based data services. Simple-to-use analyst tools, designed for business users will enhance IT business collaboration; pervasive data quality services will improve the trustworthiness of all data throughout the data integration process; and open SOA based data services will enable even more types of operational data integration projects including data virtualization.

The initial version 9 release will be available for select customers later this year and the general release for all customers is planned for early next year.

To reiterate, guided by our time tested visions and our disciplined growth strategy over the past years expanded our addressable market effectively by one more category every year. Our addressable market now encompasses buy infrastructure software categories, data integrations, data quality, B2B data exchange, application ILM, and cloud computing data integration.

And for the next five years, we have room to grow within each of these categories and even more opportunities to grow in adjacent synergistic categories.

So with that, I will open it up for your questions. As Stephanie said earlier, we would appreciate if you could confine yourselves to one question. Thank you. Operator, may we have the first question?

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Tom Ernst with Deutsche Bank. Please proceed.

Tom Ernst - Deutsche Bank

I think the long term drivers that are behind your trends for improving margins and high renewal rates and maintenance are I think are clear. My question is are you not feeling any sort of pricing pressure or seeing increase in attrition, perhaps that's been masked by the strength of your offering today. Are there any signs of pressure on that business?

Sohaib Abbasi

Tom, there have been no unusual pressures on pricing. As we have commented on, the values that we deliver is very well aligned with what the customers are looking for. Our value proposition has continued to be for our customers to go from bill to buy and our value proposition is to do more with less, and we have a lot of evidence in terms of past successes in terms of how Informatica can drive a much faster return on investment with much lower total cost of ownership. And with our relentless pace of innovation, we continue to deliver even more value. So the pricing environment has really not been any different than it has been in the past years.

Operator

Your next question comes from the line of Tom Roderick with Thomas Wiesel Partners. Please proceed.

Tom Roderick - Thomas Wiesel Partners

I wanted to ask, just in terms of the way that you're managing the sales force. You've been pretty aggressive and outspokenly so in the last year in terms of trying to get your sales reps to get their deals in early, cut deals down, and not get deals stretched out so that you are banking on the big deal at the end of the quarter. We're a year into that process now and you had a real nice quarter for seven figure deals. Any change to the strategy in terms of how you're managing the sales force and any change to your outlook for the big deal environment here?

Sohaib Abbasi

We continue to focus on operational discipline. As we commented on earlier, there are some early signs of our recovery in certain industries in Americas. However, in Europe the environment continues to be challenging. And for all those reasons, we remain very focused on ensuring that we continue to improve our operational discipline.

We have commented in the prior earnings calls that we have set targets for our sales and organization, on what we expect them to attain on a weekly basis. And that practice continues, it has helped us in two ways, one is, it has helped us focus on improving linearity and it also has helped us in improving the quality of the pipeline. And as a result it's reflected in higher close rates in the final days of the quarter. We will continue to be very disciplined.

Earl Fry

With that said, Tom I think do you point out one thing that the million dollar deals were up meaningfully year-over-year, and interesting to note that kind of the top eight deals for all in North America.

So I do think that’s an indicator that North America based customers, at least in certain vertical, are more willing to start looking at bigger initiatives, and look to running their business on a kind of more sustained and longer term basis. And I think we are positioned well there.

Tom Roderick - Thomas Wiesel Partners

Within those nine or seven figure deals, are there anything that would be characterized as a mega deal or something north of $3 million here on the license line.

Earl Fry

No. Nothing that was north of that level. And in fact eight of the nine deals start with a one.

Operator

Your next question comes from the line of Mark Murphy with Piper Jaffray. Please proceed.

Mark Murphy - Piper Jaffray

I was wondering how you would characterize Q2 specifically in terms of lead generation and in terms of pipeline build, versus your expectations or versus what you saw in Q1.

Sohaib Abbasi

The pipeline continues to grow very strongly in fact that the pipeline going in to this quarter was much stronger than it was a year ago. And as Earl commented on, we closed 50% more million dollar deals in Q2 of 2009 compared to a year ago, and the pipeline going into second half of the year also reflect similar strength.

We believe in certain segments, particularly in the US over the last several quarters, customers have been reluctant to make commitments for projects that were multi-quarter in duration and now once again they are preparing for the economic recovery, and that was reflected in significantly larger a number of million dollar deals. And the pipeline for second half also reflects such trend.

Mark Murphy - Piper Jaffray

And then Sohaib just as a follow-up, what mix of your business do you think is tied to ERP migrations these days. And I am curious to get your thoughts in the context of the upcoming roll-out of Oracles' Fusion applications, which is you probably could consider the biggest ERP migration process ever, lot of complexity, huge amounts of data that will need to be migrated. So I am just wondering what that is as a percentage of your mix?

Sohaib Abbasi

I believe that in this macroeconomic environment, customers are reluctant to rollout major ERP implementations. And I do [knock] that sense if there has been any significant shift in their sentiment.

Our customers are continuing to be refocused on their business survival strategies particularly in Europe, gaining more operational efficiencies, and in the case of Americas the customer initiatives some of which we highlighted, are to focus on ensuring that they focus under their most profitable customers. That they focus on ensuring that they could increase revenue and do so in a relatively short period of time.

Many of them are banking on ensuring that they are among the first to benefit from economic recovery, and for that reason it is unlikely that they will be making multiyear plans to meet, in fact delay, any benefit from the economic recovery.

So, we are really not banking on essentially a significant uptick of any new ERP application or significant change in the implementation phase of the ERP applications, but rather leveraging all of the data that exist in the form of mass data management projects and other such initiatives.

Operator

Your next question comes from line of Nathan Schneiderman with Roth Capital Partners. Please proceed.

Nathan Schneiderman - Roth Capital Partners

I have a few for you. Sohaib, you've referenced challenges in Europe several times during your presentation, but do you feel the environment is stable, getting a little bit better or getting worse there? And how is your perspective changed as we move through April into June and July?

Sohaib Abbasi

Well, the economic recession impacted Europe much later than the US. And in that sense our results over the several quarters have reflected that. And given that Europe was impacted more recently, I would imagine their recovery were also trailed of that in the US.

The focus as was the case in Americas for our customer has been around operational efficiency, and I cited only one such example with Credit Suisse, where they looked to Informatica to do more with less by automating one of their IT initiatives. And I expect that that we will continue to have those types of projects in Europe.

Now, we are taking the same steps that we took in Americas, and I believe we are well prepared for the coming quarters in Europe.

Nathan Schneiderman - Roth Capital Partners

And then a question on medium sized deals; the 44 or such deals you booked this quarter was down from 54 last year. Do you feel the environment has gotten tougher for these [buy] size deals, or does it just represent maybe a little shift out of the high end of a six figure deal into the low end of the seven figure deal?

Earl Fry

It's actually interesting, Nate. Most of that decline was in quiet frankly in the America, and related to two verticals. One was energy utilities and the other one was in communications. And maybe the communications one is probably the most illustrative of what's going on.

So the actual dollar contribution of orders in communications was higher this Q2 '09, versus Q2 '08, yet the number of deals over 300K was down from six to two. Now, two of those transactions were million dollar transactions.

So I think in my mind that fits with economic stabilization and recovery in certain vertical and also winners and losers being sorted out in those vertical, as well as companies basically willing to make larger bets and larger bets in terms of more significant programs and that downsizing and kind of [teasing] apart transaction.

So, I think it's really reflective of how the macroeconomic environment is affecting different geographies and different industries in different times.

Operator

(Operator Instructions). Your next question comes from line of Brian Denyeau with Oppenheimer & Company. Please proceed.

Brian Denyeau - Oppenheimer & Company

To build on the EMEA question, if you go back to the Americas you start seeing weakness in 1Q of '08. You really started making positive signs that sound that it was getting better in the first quarter of this year. Do you expect that sort of year long transition down and then starting in the way back up to play out in EMEA or are you expecting that to take longer than it did the Americas?

Sohaib Abbasi

I expect that the trend will be similar to the one that we experienced in Americas. Now EMEA is obviously a much larger region. There is a lot more diversity, and it would be difficult to generalize and characterize all of EMEA in the same manner.

Clearly the impact that the macroeconomic environment has had has varied across that whole region, and we are taking the appropriate steps within. Even within EMEA in certain geographies, we have significant transactions that are in the pipeline for the second half of the year.

But overall, I would imagine that the trend would be similar to the one that we saw in Americas, where for a period of time in certain industries, customers were reluctant to make their decisions and postpone those decisions as much as possible.

However they certainly were open to the value proposition of do more with less. And I would imagine that as the macroeconomic outlook improves, that that will be reflected in our results.

Brian Denyeau - Oppenheimer & Company

And Earl or Sohaib, any particular country that’s in EMEA especially weak during the quarter?

Earl Fry

Here again, if you look at, the UK environment has been tough, probably for longer than Central Europe. So if you want to take the US as a trend, you could say, that might be the first place that you could start to see a bit of a turnaround, maybe later in the year or early next year.

But I think it’s a little early to call that one. I think its still going to be a tough environment; we are expecting it to be a tough environment. I think South Europe will continue to be a very challenging environment at least through the remainder of the year.

Sohaib Abbasi

Let me, let me make one additional comment regarding Europe. In much the same way as our commentary was a year ago on the US, we took some steps, in order for us to improve the discipline in US to offset some of the pressures from the macroeconomic environment.

We have had a chance to analyze a lot of the ways that we could improve our operational discipline in Europe, and I am confident that as a result of that, we will see much better results.

Operator

Your next question comes from the line of Brad Whitt with Broadpoint AmTech. Please proceed.

Brad Whitt - Broadpoint AmTech

I just want to make sure I heard you clearly on version 9, are you saying that general availability is going to be next year because I think I was assuming that it was going to be out sometime this year?

Sohaib Abbasi

The general availability will be very early next year. We will have the first customer ship this year. In order words, we are expecting that we would have the initial release available for some of our customers this year that would have an impact to our revenue.

But please keep in mind that our customers, that are using the current version of our product would certainly been entitled as a result of the maintenance to the new release. So I expect that version 9 will have a significant contribution, possibly indirectly in the sales of our products.

We have had a very good feedback from our Deep Dive session in June, where we showed our products and we shared a lot of the technical details of it. And the response has been very, very positive and very encouraging.

Brad Whitt - Broadpoint AmTech

And I was just wondering if you guys could comment at all on the patent litigation particularly with JuxtaComm, whether or not that has been settled or should we expect any kind of cash outflow from that?

Earl Fry

Sure. We have made a lot of progress there and I think we're getting close to getting that result. I would expect that the litigation cost that we've been expanding in the G&A line for the last two or three quarters, I think that will diminish meaningfully in Q3, and I would hope that we could resolved with nominal impact if any on the P&L.

Operator

Your next question comes from line of Brent Williams with The Benchmark Company. Please proceed.

Brent Williams - The Benchmark Company

You were talking about deal wins, you were talking about how much of the professional services were from engagements outside of data warehousing. I believe the number you said the 78%. You characterize that it's including both data migration and master data management.

Can you give some color on, how master data management relative to data migration might have trended the last couple of quarters, and is that just kind of hanging in there or is it just sort of knock around because of deal sizes or is that on a interesting ramp. Just some qualitative color to those two uses.

Sohaib Abbasi

There clearly is growing interest in master data management and it may be one of the highest growth data integration project types for the first half of this year.

Our customers are looking to make the most of the investments they've made across its various specific applications. And one way that they have identified that they can get a lot more value is by having a master data management solution, a data hub.

And I cited a few examples in the earnings script of Duke Energy building a customer hub, a healthcare provider building a data hub, and increasingly organizations are looking at master data management and data hub projects.

Now the traditional strength of Informatica positions us extremely well in that market. We have now universal connectivity to all the sources of data, more sources than anyone else in the industry could support.

We also provide data quality products that are differentiated with identity resolution, having a data quality that works across all data types. And we provide extreme scalability to be able to move data into that master hub and then use it as a reference data to synchronize with all the other data sources as well.

So, those unique differentiators and our track record of success coupled with the fact that we provide a methodology for best practices as part of IPS has positioned us extremely well and it is a very promising growth opportunity for Informatica.

Brent Williams - The Benchmark Company

And sort of drilling into that a little bit more, can you give us sense of is that small but growing, is it becoming materially interesting, is it lager deal sizes; inline deal sizes that sort of thing?

Sohaib Abbasi

It is already materially interesting and that we are providing a lot of the technology that is being used for building mass data management solutions and data hubs. And it is helping to position our data integration platform, including data quality, including identity resolutions, and in some cases even B2B data exchange. So, it leverages all of our technology and positions us uniquely.

Operator

Your next question comes from line of Nabil Elsheshai with Pacific Crest Securities. Please proceed.

Nabil Elsheshai - Pacific Crest Securities

I was wondering if you could comment a little bit linearity, given that your comments are all about the DSOs. Was linearity in the quarter normal or was it skewed little bit to the back end? And then on Q1 you mentioned March getting better, have you seen that trend continue or has it largely stayed stable at that slightly better level?

Earl Fry

So, linearity was actually very similar to what we had in Q1. I think maybe at the margin what we are seeing are customers on the services side of things, even on maintenance renewal delaying until the last minute or even taking a month or two longer to get their renewals done.

There were a number of transactions, a couple of them very significant maintenance renewal transactions, for example, that didn't get in until July that affects both, deferred as well as obviously affects the billing linearity as well as their cash collections during the quarter.

So, I would say kind on average it's probably the same as it was in Q1, or maybe a little worse, but not necessarily worse on the license side. And then as far as the seeing some positive signs in terms of close rates in March, that did continue, particularly in the US that did continue in the second quarter.

Operator

Your next question comes from the line of Derrick Wood with Wedbush Morgan Securities. Please proceed.

Derrick Wood - Wedbush Morgan Securities

Wondering if you had any thoughts on the acquisition of GoldenGate Software that Oracle announced today? Just curious, how you guys have competed against them in the past, and how your technology is different. And then as a follow-up, wondering if you are seeing any change in competition from Oracle's data integrator product.

Sohaib Abbasi

In the past five years, we have not competed against GoldenGate. And the reason for it is that we provide distinctly different technologies. The best way to characterize GoldenGate technology would be for data movement applications and that's why they are used primarily for high availability.

We have a very strong partnership that over the last five years has been further strengthened, and I expect that we will continue to partner very strongly with Oracle. Now as far as GoldenGate technology is concerned, the overlap that may exist is not with data integration technology, it is with Oracle's owned data base technology.

In that Oracle data base promotes Oracle [stream] as the preferred way of moving data, and clearly Oracle would have to rush clients between the two because GoldenGate has not yet use the streams technology.

And the interesting question would be, could Teradata rely on Oracle to help promote Teradata's dual active data warehouse over Oracle's own flagship of database product. Now in contrast with our neutrality customers would not have any such questions.

Now as far as competition with the Oracle data integrator or for that matter any of the other competitors, the competitive landscape has not changed much over the years. We compete with Oracle in less than 5% percent of our deals, and at the same time we value our partnership with Oracle.

Oracle continues to rely on Informatica as part of Oracle Business Intelligence Enterprise Edition, as part of Hyperion, as part of Memphis, and a number of other environment. And I expect that we will continue to enjoy a strong partnership with Oracle as we do with HP and SAP and Microsoft. Thank you.

Operator

Your next question comes from the line of Patrick Walravens with JMP Securities. Please proceed.

Patrick Walravens - JMP Securities

I’m just wondering, where do you think your operating margins can go on a pro-forma basis? Thank you.

Sohaib Abbasi

We are clearly very encouraged by the improving macroeconomic environment in the US, and we are equally confident that we could take steps in terms of improving our performance in all of the different major regions.

The demand for our products is stronger than ever; our value proposition is more compelling than ever; we have the broadest ever product set; and as always we balance our growth and target, and profitability targets. And over the last five years we clearly have been able to do both.

The compound annual growth rate for the past four years was almost 20% and yet we were able to grow our profitability dramatically faster. And as the macroeconomic environment continues to evolve, we'll continue to weigh in what our options are, and as Earl said earlier in the guidance, that we are very confident in our ability to attain 23% or better margins this year.

Operator

You're next question comes from the line of Brad [Self] with Barclays Capital. Please proceed.

Brad Self - Barclays Capital

Just a question on what you saw on the financials vertical, you mentioned improving results. So just maybe a little more color, was it better deal volume, deal sizes or are these customers moving more towards strategic projects over a more kind of defensive type thing.

Sohaib Abbasi

Brad let me comment a little bit about what we've observed in financial services, and then I'm going to ask Earl to comment as well.

My observation is that the financial services sector, particularly in the US had never experienced what they went through. And as a result of it, it impacted their purchasing processes, their priorities, and they were unprepared to make decisions regarding spend that was not associated with something that was very short-term.

In other words, for several quarters, there has been a pent up demand for our technologies that was not fulfilled, because of this paralysis. And now in fact that in of my meetings with one of the leaders in the financial services organization, they have jokingly said that they have come to the realization that the world is not coming to an end. And as a result of it, now they are preparing for the economic recovery. And that was reflective in what we announced this quarter.

In fact some of these same customers we had tried to engage with them a couple of quarters ago, and they were simply not prepared to have their discussion. And now that they are in a better position to prepare for the economic recovery, we are benefiting from all that pent up demand.

Earl Fry

And both in terms of deal volume with the larger transaction sizes as well as deal sizes, both of those are up nicely. I think that this is really more reflective of the Americas than anywhere else. I think it's still going to be a tougher environment, my guess in [EMEA] for a little while. But both deal volume, deal [size] is in the US, and in fact I think it's something like five of our top 13 deals this quarter came out of the financial services vertical.

Operator

Your final question comes from the line of Daniel Cummins with Soleil. Please proceed.

Daniel Cummins - Soleil

I wanted to just ask quickly here about sales and marketing for the quarter. Was there anything non-recurring in that results, and does it necessarily have to go a little bit higher here to be let say, the midpoint of revenue guidance in other words a quarter-on-quarter increase in revenue. Thank you.

Earl Fry

Sales and marketing in Q2 always is likely higher than run rate because traditionally we had our large user conference. Again we scaled that back so the bump may not have been quite as large as you might have seen in prior years.

However, there are still basically one-time or annual charges that show up in Q2, as a result of putting on that event and incremental travel. So, I do expect that, you know, everything else kind of being equal, we should expect that sales and marketing to come down Q2 to Q3. Thanks.

Operator

At this time, I would like to turn the call back to Sohaib Abbasi for closing remarks.

Sohaib Abbasi

For the remainder of 2009, we remain similarly focused, [advancing] Informatica as the number one independent leader in data integration. We have room to grow and to increase operating income in the quarters to come. Thank you very much.

Operator

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.

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